What happens if I forgive the Loan? (Teaser - Tax Questions!)

Provided by:  Jennifer Kirschenbaum, Esq.

September 19, 2019

Question:

Hi Jennifer,

Thank you for addressing the loan question.  What happens if I make a loan to an employee and then I forgive the amount after the employee works long enough? 

Thanks, 
Dr. L

Answer:

Now we're getting in to TAX, which is definitely not my area.  I'll start and end with - you have to consult you accountant.  I'll stick in the middle that forgiveness of a debt may result in a tax consequence, including inclusion as income or qualifying under gift tax rules.  More on that here - https://www.irs.gov/taxtopics/tc431.   Any time you are looking to make a loan, you need me, your lawyer, and your accountant on the same page.  We need to understand the proper vehicle to capture the loan, security and tax implications.  Sayings exist for a reason.  The one I would apply in the context of friendly loans - No Good Deed Goes Unpunished.  Paper properly,  Understand consequences.  Consult legal AND your accountant.  

Note: for our purposes we are not touching the issue of collateral.  Whole other discussion... 

Good questions!